Determinants and Consequences of Tax Service Provider Choice in the Not-for-Profit Sector

Abstract:     
This study examines the determinants and consequences of tax service provider choice among not-for-profit (NFP) organizations. Understanding how clients choose among professional services firms for tax services is important due to the economic significance of tax service revenues to public accounting firms and regulatory changes to the market for tax services following the Sarbanes-Oxley Act. Because public accounting firms compete with law and consulting firms for tax clients, we examine whether factors that influence the organizational structure of professions – client proximity and knowledge availability – influence clients’ decisions to purchase tax services. Using data from the U.S. NFP sector where the decision to purchase tax services is observable for all organizations, we find that NFPs are less likely to retain their auditor for tax services as knowledge availability and distance to the auditor increase. In addition, we document two consequences of tax provider choice: (1) self-preparing NFPs are more likely to misreport executive compensation on their return and (2) NFPs retaining the auditor for tax services receive higher contributions from the public. Furthermore, NFPs changing to a non-auditor preparer or to self-preparing the return receive lower contributions the following year, suggesting that donors attach lower credibility to non-auditor and self-prepared returns.

Number of Pages in PDF File: 49

Keywords: tax services, nonaudit services, tax provider choice, professional services firms, nonprofit organizations, organizational structure

JEL Classification: M40, M41, M42, M49

working papers series